Anthem Cigna Merger Blocked
February 8, 2017
On February 8, 2017, Judge Jackson blocked Anthem Inc.’s (“Anthem”) acquisition of Cigna Corp. (“Cigna”) finding that the merger would likely harm competition. The district court wholly refuted the parties’ argument that efficiencies would be pro-consumer and a counter-weight to potential competitive problems. U.S. District Court Judge Amy Berman Jackson also recognized the highly abnormal relationship between Anthem and Cigna, saying the Department of Justice’s Antitrust Division (“DOJ”) was not the only party in the case raising questions about the merger.
Below are three key quotations from the order.
Anthem is asking the Court to go beyond what any court has done before: to bless this merger because customers may end up paying less to healthcare providers for the services that the providers deliver even though the same customers are also likely to end up paying more for what the defendants sell: the ASO contracts that are the sole product offered in the market at issue in this merger. It asks the Court to do this because it is the insurers that negotiate the in-network provider discounts, access to those rates is part of what the customers are buying when they buy health insurance, and medical costs account for the overwhelming portion of any customer’s total healthcare expenditure. In short, Anthem is encouraging the Court to ignore the risks posed by the proposed constriction in the health insurance industry in the relevant market on the grounds that consumers might benefit from the large size of the new company in other ways at the end of the day. But this is not a cognizable defense to an antitrust case; the antitrust laws are designed to protect competition, and the claimed efficiencies do not arise out of, or facilitate, competition.
In short, the Court should decide that the pressure the merger would place on providers would be beneficial to consumers in general. But the record created for this case did not begin to provide the information needed to reveal whether all providers, no matter their size, location, or financial structure, are operating at comfortable margins well above their costs, as Anthem’s expert suggested, or whether Anthem’s use of its market power to strong-arm providers would reduce the quality or availability of healthcare as the plaintiffs alleged. And the trial did not produce the sort of record that would enable the Court to make – nor should it make – complex policy decisions about the overall allocation of healthcare dollars in the United States.
In this case, the Department of Justice is not the only party raising questions about Anthem’s characterization of the outcome of the merger: one of the two merging parties is also actively warning against it. Cigna officials provided compelling testimony undermining the projections of future savings, and the disagreement runs so deep that Cigna cross-examined the defendants’ own expert and refused to sign Anthem’s Findings of Fact and Conclusions of Law on the grounds that they “reflect Anthem’s perspective” and that some of the findings “are inconsistent with the testimony of Cigna witnesses.” Anthem urges the Court to look away, and it attempts to minimize the merging parties’ differences as a “side issue,” a mere “rift between the CEOs.” But the Court cannot properly ignore the remarkable circumstances that have unfolded both before and during the trial.
Cigna Terminates the Deal
On February 14, 2017, Cigna announced that it exercised its right to terminate the proposed merger agreement with Anthem. In light of the district court’s ruling against the deal, Cigna believes that the transaction cannot and will not achieve regulatory approval and that terminating the agreement is in the best interest of Cigna’s shareholders. To effect this termination, Cigna filed suit against Anthem in the Delaware Court of Chancery. The suit seeks declaratory judgment that Cigna has lawfully terminated the Merger Agreement and that Anthem is not permitted to extend the termination date. The complaint seeks payment by Anthem of the $1.85 billion reverse termination fee contemplated in the merger agreement, as well as additional damages in an amount exceeding $13 billion. These additional damages include the amount of premium that Cigna shareholders did not realize as a result of the failed merger process. Cigna said this action is necessary to enforce and preserve the company’s rights and protect the interests of its shareholders. Cigna believes strongly in the merits of its case and hopes that this matter is rapidly resolved. The decision to prematurely terminate the transaction and seek damages is more arguably more evidence that Cigna did not fulfill its contractual obligations under the agreement as it openly fueded with Anthem throughout the DOJ’s investigation and the trial.
Anthem Responds to Cigna with a Court Filing of its Own
On February 15, 2017, Anthem announced that it filed a lawsuit seeking a temporary restraining order to enjoin Cigna from terminating, and taking any action contrary to the terms of, the Merger Agreement, specific performance compelling Cigna to comply with the Merger Agreement and damages. On the same day, a Delaware Chancery judge granted Anthem’s motion for a temporary restraining order, barring, at least for now, Cigna’s efforts to terminate the deal until April 10th hearing date.
On January 18, 2017, Anthem extended its Merger Agreement with Cigna through April 30, 2017. In addition to the fact that Anthem extended the termination date in the Merger Agreement, Anthem said Cigna does not have a right to terminate the Merger Agreement at all because it failed to perform fully its obligations in a manner that has proximately caused or resulted in the failure of the merger to have been consummated. Moreover, Anthem argues that it believes that there is still sufficient time and a viable path forward potentially to complete the transaction.
D.C. Circuit Grants Anthem’s Motion for Expedited Appeal
On February 17, 2017, the D.C. Circuit granted Anthem’s motion to expedite its appeal of the lower court’s ruling blocking Anthem’s proposed acquisition of Cigna. In a short order, the appeals court set a briefing schedule (Feb 24 amici briefs due, March 13 DOJ’s brief is due, and March 17 those supporting DOJ can submit briefs, March 20 Anthem can submit its reply), with oral arguments to be held on March 24. Anthem appealed the decision to block the merger, arguing that Judge Jackson’s ruling ignored benefits for consumers. Judge Jackson found that the proposed combination would eliminate the two companies’ vigorous competition with one another.
What is going on?
Anthem is not giving up on its deal or on its $1.85 billion break-up fee. But, the fact that Anthem has filed the appeal does not mean that Anthem has a legitimate shot at winning or at actually closing the Cigna deal. Indeed, Anthem needs to show that Judge Berman’s findings were clearly erroneous, which is a tall order. So, its appeal simply means that it is willing to play this out to the very end. Why not take a shot? What does Anthem have to lose at this point besides time and money. On the one hand, Anthem is making an argument that makes a lot of sense. By consummating the deal, Anthem argues that it will be able to lower healthcare costs for its administrative service only (“ASO”) national account customers. Judge Berman says that this is not a proper defense to Anthem’s ability to increase ASO fees to these same customers. More to come in future blogs, but it will be interesting to see how the D.C. Circuit rules. Anthem’s real problem is time and whether it can either work out a settlement with the DOJ, win its appeal, and on top of that secure various state approvals by April 30th. Time is not on Anthem’s side, but why not play this out and fight Cigna on whether it deserves the break up fee.
- The appeal is U.S. v. Anthem Inc., No. 17-5024 (D.C. Cir.)
- The declaratory judgment actions are Cigna Corp. v. Anthem, Inc. et al., No. 2017-0109, and Anthem Inc. v. Cigna Corp., No. 2017-0114, both in the Court of Chancery of the State of Delaware